Question

Consider the following premerger information about a bidding firm (Firm B) and a target firm (Firm T). Assume that both firms have no debt outstanding.

	Firm B			Firm T
Shares outstanding		5,400			1,300
Price per share	$	53		$	23

Firm B has estimated that the value of the synergistic benefits from acquiring Firm T is $7,900.

a.	If Firm T is willing to be acquired for $25 per share in cash, what is the NPV of the merger?

NPV

$

What will the price per share of the merged firm be assuming the conditions in (a)? (Do not round intermediate calculations and round your answer to 2 decimal places, e.g., 32.16.)

Share price

$

c.	If Firm T is willing to be acquired for $25 per share in cash, what is the merger premium?

Merger premium

$

d.	Suppose Firm T is agreeable to a merger by an exchange of stock. If B offers one of its shares for every two of T's shares, what will the price per share of the merged firm be? (Do not round intermediate calculations and round your answer to 2 decimal places, e.g., 32.16.)

Price per share

$

e.	What is the NPV of the merger assuming the conditions in (d)? (Do not round intermediate calculations and round your answer to 2 decimal places, e.g., 32.16.)

NPV

$

Answer 1

a. If Firm T is willing to be acquired for $25 per share in cash, what is the NPV of the merger?

NPV of the merger = Present Value of Incremental Cash Flows - Amount paid for acquiring the target company

In the given question,

Amount paid for acquiring and merging the target company = $25 per share x 1300 shares = $32,500

Present Value of Incremental Cash Flows = Market Value of Target Firm T's shares + Synergistic benefits from acquiring firm T

= ( $23 per share x 1300 shares ) + $7,900 = $29,900 + $7,900 = $37,800

So, NPV of the Merger = $37,800 - $ 32,500 = $5,300

___________________________________________________________________

b. What will the price per share of the merged firm be assuming the conditions in (a)?

As per the conditions in (a), the firm T is acquired by paying in cash. So, there is no increase in number of equity shares.

Price per share of the merged firm = (Market Value of Firm B before merger+ Market Value of Firm T before merger + Synergistic benefits ) / No. of Shares post - merger

MV of Firm B before merger = 5,400 shares x $53 = $286,200

MV of Firm T before Merger =  $23 per share x 1300 shares = $29,900

Synergistic benefits = $7,900

No. of shares of Firm B post merger = No. of shares of Firm B before merger = 5,400 shares

Price per share of the merged firm = ( $ 286,200 + $29,900 + $7,900 ) / 5400 = $60 per share

______________________________________________________________________________________________

c. If Firm T is willing to be acquired for $25 per share in cash, what is the merger premium?

Merger premium is the amount paid to acquire the target company, over and above its market value.

So, Merger Premium = Amount paid to acquire Firm T - Market value of Firm T

= ($25 x 1300 shares ) - ($23 x 1300 shares) = $2,600

_______________________________________________________________________________________________

d. Suppose Firm T is agreeable to a merger by an exchange of stock. If B offers one of its shares for every two of T's shares, what will the price per share of the merged firm be?

Exchange ratio = 1 : 2 , that is, 1 share of Firm B will be paid for every 2 shares of firm T.

No. of new shares to be issued to Firm T by Firm B = No. of shares of Firm T x Exchange Ratio = 1300 x 1 / 2 = 650 shares

Total no. of shares of Firm B post merger = 5400 shares + 650 new shares to be issued to Firm T = 6050 shares

Total Value of the merged entity = Market Value of Firm B before merger+ Market Value of Firm T before merger + Synergistic benefits = $ 286,200 + $29,900 + $7,900 = $324,000

Price per share of the merged firm = Total Value of the merged entity / Total no. of shares of Firm B post merger

= $324,000 / 6050 shares = $ 53.55

______________________________________________________________________________________________

e. What is the NPV of the merger assuming the conditions in (d)

NPV of the merger = Present Value of Incremental Cash Flows - Amount paid for acquiring the target company

In (d),

Amount paid for acquiring and merging the target company = No. of shares issued to Firm T x Price per share of the merged firm = 650 shares x $53.55 per share = $34,807.50

Present Value of Incremental Cash Flows = Market Value of Target Firm T's shares + Synergistic benefits from acquiring firm T = ( $23 per share x 1300 shares ) + $7,900 = $29,900 + $7,900 = $37,800

So, NPV of the merger = $37,800 - $34,807.50 = $2,992.50